Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion regarding our financial condition and results of
operations for the three months ended March 31, 2009 and March 31, 2008 should
be read in conjunction with the more detailed financial information contained in
our consolidated financial statements and their notes included elsewhere in this
quarterly report.
Overview of Business
M & F Worldwide Corp. ("M & F Worldwide" and, together with its subsidiaries,
the "Company") is a holding company that conducts its operations through its
indirect wholly owned subsidiaries, Harland Clarke Holdings and Mafco Worldwide.
The Company's businesses are organized along four business segments: Harland
Clarke, Harland Financial Solutions, Scantron and Licorice Products.
The Harland Clarke segment offers checks and related products, forms and
treasury supplies, and related delivery and fraud prevention services. It also
provides specialized marketing and contact center services to its financial and
commercial institution clients. Harland Clarke's marketing offerings include
turnkey marketing solutions, checkbook messaging and e-mail marketing. Through
its contact centers, Harland Clarke provides financial institutions with both
inbound and outbound support for their clients, including sales and ordering
services for checks and related products and services, customer care and banking
support, and marketing services.
The Harland Financial Solutions segment provides products and services
including lending and mortgage origination and servicing applications, business
intelligence solutions, customer relationship management software, Internet
banking solutions, mobile banking, branch automation solutions and core
processing systems and services, principally targeted to community banks and
credit unions.
The Scantron segment provides testing and assessment solutions to schools in
North America, offers specialized data collection solutions to educational,
commercial and governmental entities worldwide and collects and manages survey
information for a wide variety of Fortune 1000 and other organizations.
Scantron's products and services include scannable forms, scanning equipment,
survey services, testing software and related services, and field maintenance
services.
The Licorice Products segment, which is operated by Mafco Worldwide, produces
a variety of licorice products from licorice root, intermediary licorice
extracts produced by others and certain other ingredients. Approximately 66% of
Mafco Worldwide's licorice product sales are to the worldwide tobacco industry
for use as tobacco flavor enhancing and moistening agents in the manufacture of
American blend cigarettes, moist snuff, chewing tobacco and pipe tobacco. In
addition, Mafco Worldwide manufactures and sells natural products for use in the
tobacco industry. Mafco Worldwide also sells licorice to confectioners, food
processors, cosmetic companies and pharmaceutical manufacturers for use as
flavoring or masking agents, including its Magnasweet brand flavor enhancer,
which is used in various brands of chewing gum, energy bars, non-carbonated
beverages, lip balm, chewable vitamins, aspirin and other products. Mafco
Worldwide sells licorice root residue as garden mulch under the name Right
Dress.
The Transaction Holdings Acquisition
On December 31, 2008, the Company's indirect wholly owned subsidiary, Harland
Clarke Corp., acquired Transaction Holdings Inc. for total cash consideration of
$8.2 million. Transaction Holdings produces personal and business checks,
payment coupon books, promotional checks and provides direct marketing services
to financial institutions, as well as individual consumers and small businesses.
The Data Management Acquisition
On February 22, 2008, the Company's indirect wholly owned subsidiary,
Scantron Corporation, purchased all of the limited liability membership
interests of Data Management I LLC ("Data Management") from NCS Pearson, for
$218.7 million in cash, after giving effect to working capital adjustments of
$1.6 million (the "Data Management Acquisition"). Data Management designs,
manufactures and services scannable data collection products, including printed
forms, scanning equipment and related software, and provides survey consulting
and tracking services,
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M & F Worldwide Corp. and Subsidiaries
including medical device tracking, as well as field maintenance services to
corporate and governmental clients. The Company financed the Data Management
Acquisition and related fees and expenses with cash on hand at Harland Clarke
Holdings.
With these and previous acquisitions, the Company is focused on improving
operating margins by reducing selling, general and administrative expenses,
shared services costs and cost of sales.
Economic and Other Factors Affecting the Businesses of the Company
Harland Clarke
While total non-cash payments - including checks, credit cards, debit cards
and other electronic forms of payment - are growing, the number of checks
written has declined and is expected to continue to decline. Harland Clarke
believes the number of checks printed is driven by the number of checks written,
the number of new checking accounts opened and reorders reflecting changes in
consumers' personal situations, such as name or address changes. Checks written
remain one of the largest forms of non-cash payment in the United States. A 2007
study by the Federal Reserve analyzing check writing patterns determined that
the number of checks written declined 4.1% over the period from 2003 to 2006.
Whereas in the past, Harland Clarke had experienced declines in check volumes
generally consistent with the Federal Reserve study, in recent periods Harland
Clarke is experiencing check unit declines higher than those reflected in the
Federal Reserve study. Harland Clarke is unable to determine at this time
whether such declines above Federal Reserve estimates are attributable to timing
issues, decreased openings of checking accounts, underlying differences in
measurement methodologies, recent economic and financial market difficulties,
and/or a further acceleration in check unit declines. Harland Clarke is focused
on growing its business through the addition of a variety of non-check-related
products and services and optimizing its existing catalog of offerings to better
serve its customers.
The financial institution outsourcing services industry is highly competitive
and fragmented. Quality and breadth of service offerings and strength of
customer relationships are among the key competitive factors. Within this
category, Harland Clarke competes with large outsourcing service providers that
offer a wide variety of services, and some compete with Harland Clarke's primary
offerings - specifically payment services, marketing services and teleservices.
Other competitors specialize in providing one or more of these services.
The Harland Clarke segment's operating results are also affected by consumer
confidence and employment. Consumer confidence directly correlates with consumer
spending, while employment also affects revenues through the number of new
checking accounts being opened. The Harland Clarke segment's operating results
may be negatively affected by slow or negative growth of, or downturns in, the
United States economy. Business confidence affects a portion of the Harland
Clarke segment. In addition, if Harland Clarke's financial institution customers
fail or merge with other financial institutions, Harland Clarke may lose some or
all revenues from such financial institutions and/or experience further pricing
pressure, which would negatively affect Harland Clarke's operating results.
Harland Financial Solutions
Harland Financial Solutions' operating results are affected by the overall
demand for our products, software and related services which is based upon the
technology budgets of our clients and prospects. Economic downturns in one or
more of the countries in which we do business could result in reductions in the
information technology, or IT, budgets for some portion of our clients and
potentially longer lead-times for acquiring Harland Financial Solutions products
and services. In addition, if Harland Financial Solutions' financial institution
customers fail or merge with other financial institutions, Harland Financial
Solutions may lose some or all revenues from such financial institutions and/or
experience further pricing pressure, which would negatively affect Harland
Financial Solutions' operating results.
The markets for our Harland Financial Solutions products are affected by
technological change, evolving industry standards, regulatory changes in client
requirements and frequent new product introductions and enhancements. The
markets for providing technological solutions to financial institutions and
other enterprises require that we
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M & F Worldwide Corp. and Subsidiaries
continually improve our existing products and create new products, while
controlling costs to remain price competitive.
The market for providing technological solutions to financial institutions is
highly competitive and fragmented. Harland Financial Solutions competes with
several domestic and international companies. Some competitors offer one or more
specialized products or services that compete with Harland Financial Solutions.
Certain competitors have advantages over Harland Financial Solutions due to
their significant worldwide presence, longer operating and product development
history, larger installed client base, and substantially greater financial,
technical and marketing resources. In response to competition, Harland Financial
Solutions has been required in the past, and may be required in the future, to
furnish additional discounts to clients, otherwise modify pricing practices or
offer more favorable payment terms or more favorable contractual implementation
terms.
Scantron
While the number of tests given annually in K-12 and higher education markets
continues to grow, the demand for Optical Mark Reader paper based testing has
declined and is expected to continue to decline. Changes in educational funding
can affect the rate at which schools adopt new technology thus slowing the
decline for paper based testing but also slowing the demand for Scantron's
on-line testing products. Educational funding changes may also reduce the rate
of consumption of Scantron's forms and purchase of additional hardware to
process these forms. A weakening economy in the United States may negatively
affect education budgets and spending, which would have an adverse impact on
Scantron's operating results.
Data collection for non-testing applications such as surveys is also
experiencing a conversion to non-paper based methods of collection. Scantron
believes this trend will also continue as the availability of these alternative
technologies becomes more widespread. Changes in the overall economy can impact
the demand for surveys as companies look for ways to adjust their expenditures.
Mafco Worldwide
Developments and trends within the tobacco industry may have a material
effect on the operations of Mafco Worldwide. Worldwide consumption of American
blend cigarettes has declined approximately 2% to 3% per year for the past five
years; however, this decline has accelerated recently to approximately 5%.
Changing public attitudes toward tobacco products, an increase in excise and
other taxes on cigarettes and a constant expansion of tobacco regulations in a
number of countries have contributed significantly to this worldwide decline in
consumption. Consumption of chewing tobacco and moist snuff is concentrated
primarily in the United States. Domestic consumption of chewing tobacco products
has declined by approximately 5% per year over the past five years. Moist snuff
consumption has increased approximately 6% per year over the past five years due
at least in part to the shift away from cigarettes and other types of smoking
and smokeless tobacco.
Producers of tobacco products are subject to regulation in the United States
at the federal, state and local levels, as well as in foreign countries. The
United States House of Representatives passed legislation on April 2, 2009 that
would provide greater regulatory oversight for the manufacture of tobacco
products including proposals that could grant government agencies the ability to
regulate tobacco product additives. The legislation is now being considered by
the United States Senate. Such legislation, if enacted, could potentially limit
the type or quantity of additives that may be used in the manufacture of tobacco
products in the United States. Together with changing public attitudes toward
tobacco products, a constant expansion of tobacco regulations worldwide has been
a major cause for the decline in consumption. Moreover, the trend is toward
increasing regulation of the tobacco industry. Restrictive foreign tobacco
legislation has been on the rise in recent years as well, including restrictions
on where tobacco may be sold and used, warning labels and other graphic
packaging images, product constituent limitations and a general increase in
taxes.
Over the years, there has been substantial litigation between tobacco product
manufacturers and individuals, various governmental units and private health
care providers regarding increased medical expenditures and losses allegedly
caused by use of tobacco products. In part, as a result of settlements in
certain of this litigation, the cigarette companies have significantly increased
the wholesale price of cigarettes in order to recoup the cost of the
settlements. Since 1999, cigarette consumption in the United States has
decreased due to the higher prices of
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M & F Worldwide Corp. and Subsidiaries
cigarettes, the increased emphasis on the health effects of cigarettes and the
continuing restrictions on smoking areas.
The tobacco industry, including cigarettes and smokeless tobacco, has been
subject to federal, state, local and foreign excise taxes for many years. In
recent years, federal, state, local and foreign governments have increased or
proposed increases to such taxes as a means of both raising revenue and
discouraging the consumption of tobacco products. In February 2009, the Federal
State Children's Health Insurance Program (SCHIP) was enacted. The additional
taxes imposed by SCHIP may lead to an accelerated decline in tobacco products
sold in the United States. This bill is being funded by raising the federal tax
on cigarettes to $1.00 per pack from the current $0.39 per pack tax and by
significantly increasing federal taxes on cigars and other tobacco products.
Other proposals to increase taxes on tobacco products are also pending in both
the United States and in foreign countries. A significant reduction in
consumption of cigarettes and other tobacco products could have a material
adverse effect on Mafco Worldwide.
Critical Accounting Policies and Estimates
There was no material change to the Company's Critical Accounting Policies
and Estimates included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2008 as filed on February 27, 2009 with the United States
Securities and Exchange Commission ("SEC"), which is available on the SEC's
website at www.sec.gov.
See Note 2 to the consolidated financial statements included elsewhere in
this quarterly report on Form 10-Q regarding the impact of recent accounting
pronouncements adopted by the Company on the Company's financial condition and
results of operations.
Consolidated Operating Results
The Company has organized its businesses along four reportable segments
together with a corporate group for certain support services. The Company's
operations are aligned on the basis of products, services and industry.
Management measures and evaluates the reportable segments based on operating
income.
Three Months Ended March 31, 2009 Compared to Three Months Ended March 31, 2008
The operating results for the three months ended March 31, 2009, as reflected
in the accompanying consolidated statements of income and described below,
include the operating results of the acquired Transaction Holdings business. The
operating results for the Scantron segment include Data Management operations
from February 22, 2008, the date of the Data Management Acquisition.
Net Revenues:
Three Months Three Months
Ended Ended
$ in millions March 31, 2009 March 31, 2008
Consolidated Net Revenues:
Harland Clarke Segment $ 315.1 $ 332.1
Harland Financial Solutions Segment 69.2 71.2
Scantron Segment 54.4 41.6
Licorice Products Segment 25.7 27.5
Eliminations (0.1 ) (0.4 )
Total $ 464.3 $ 472.0
|
Net revenues decreased by $7.7 million to $464.3 million in the 2009 period
from $472.0 million in the 2008 period. The Data Management Acquisition
accounted for an increase of $14.6 million in net revenues.
Net revenues for the Harland Clarke segment decreased by $17.0 million, or
5.1%, to $315.1 million in the 2009 period from $332.1 million in the 2008
period, primarily as a result of volume declines from check and related
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M & F Worldwide Corp. and Subsidiaries
products, which we believe were partially affected by the economic downturn, as
well as one less production day in the 2009 period. Declines in volumes were
partially offset by increased revenues per unit.
Net revenues for the Harland Financial Solutions segment decreased by
$2.0 million, or 2.8%, to $69.2 million in the 2009 period from $71.2 million in
the 2008 period as a result of revenue decreases from both the risk management
and enterprise solutions product lines. Net revenues from the risk management
product lines decreased $0.3 million in the 2009 period compared to the 2008
period primarily due to declines in mortgage products, partially offset by
growth in other lending products. Net revenues from the enterprise solutions
product lines decreased $1.7 million in the 2009 period compared to the 2008
period primarily due to a slight decline in new bookings, which we believe was
partially related to the economic downturn. Net revenues in the 2009 and 2008
periods also included charges of $0.1 million and $1.0 million, respectively,
for non-cash fair value purchase accounting adjustments to deferred revenue
related to an acquisition.
Net revenues for the Scantron segment increased by $12.8 million to
$54.4 million in the 2009 period from $41.6 million in the 2008 period as a
result of the Data Management Acquisition, which accounted for an increase of
$14.6 million. The remaining $1.8 million decrease is due to declines from the
legacy Scantron product lines, which we believe were negatively affected by the
economic downturn. Net revenues in the 2009 and 2008 periods also included
charges of $0.1 million and $0.3 million, respectively, for non-cash fair value
purchase accounting adjustments to deferred revenue related to acquisitions.
The fair value adjustments are one-time reductions in revenues attributable
to the purchase accounting for acquisitions. Net revenues will continue to be
affected by these adjustments until all acquired deferred revenue is recognized
in the consolidated statements of income. The Company has recognized
substantially all of the revenue impact resulting from the deferred revenue fair
value adjustments for acquisitions.
Net revenues for the Licorice Products segment decreased by $1.8 million, or
6.5%, to $25.7 million in the 2009 period from $27.5 million in the 2008 period.
Magnasweet and licorice derivatives sales decreased by $0.4 million and sales of
licorice extract to the worldwide tobacco industry decreased by $0.6 million,
primarily as the result of a decline in shipment volumes to Magnasweet, licorice
derivative and tobacco customers. Sales of licorice extract to non-tobacco
customers decreased by $0.8 million as a result of lower shipment volumes and
the unfavorable impact of the U.S. dollar translation of Mafco Worldwide's Euro
denominated sales due to the stronger dollar in the 2009 period versus the 2008
period. The decline in shipment volumes for the 2009 period compared to the 2008
period for all of Mafco Worldwide's products was primarily the result of order
shipment timing and continued worldwide consumption declines in tobacco products
using licorice.
Cost of Revenues:
Three Months Three Months
Ended Ended
$ in millions March 31, 2009 March 31, 2008
Consolidated Cost of Revenues:
Harland Clarke Segment $ 200.8 $ 215.4
Harland Financial Solutions Segment 30.0 30.4
Scantron Segment 30.4 22.8
Licorice Products Segment 14.0 14.8
Eliminations (0.1 ) (0.4 )
Total $ 275.1 $ 283.0
|
Cost of revenues decreased by $7.9 million to $275.1 million in the 2009
period from $283.0 million in the 2008 period. The Data Management Acquisition
accounted for an increase of $9.4 million in cost of revenues.
Cost of revenues for the Harland Clarke segment decreased by $14.6 million,
or 6.8%, to $200.8 million in the 2009 period from $215.4 million in the 2008
period. The decrease in cost of revenues was primarily due to lower volumes,
labor cost reductions and one less production day in the 2009 period, partially
offset by increases in
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M & F Worldwide Corp. and Subsidiaries
materials and delivery expenses. Cost of revenues as a percentage of revenues
for the Harland Clarke segment was 63.7% in the 2009 period as compared to 64.9%
in the 2008 period.
Cost of revenues for the Harland Financial Solutions segment decreased by
$0.4 million, or 1.3%, to $30.0 million in the 2009 period from $30.4 million in
the 2008 period. The decrease in cost of revenues was primarily due to decreases
in overhead expenses and amortization of intangible assets. Cost of revenues as
a percentage of revenues for the Harland Financial Solutions segment was 43.4%
in the 2009 period as compared to 42.7% in the 2008 period.
Cost of revenues for the Scantron segment increased by $7.6 million to
$30.4 million in the 2009 period from $22.8 million in the 2008 period. The
increase was primarily due to the Data Management Acquisition, which accounted
for an increase of $9.4 million. The remaining $1.8 million decrease was
primarily due to revenue decreases from the legacy Scantron product lines and
cost reductions related to the Data Management Acquisition. The 2008 period also
includes $0.3 million for a fair value adjustment to inventory recorded in the
purchase accounting for the Data Management Acquisition. Cost of revenues as a
percentage of revenues for the Scantron segment was 55.9% in the 2009 period as
compared to 54.8% in the 2008 period.
Cost of revenues for the Licorice Products segment was $14.0 million in the
2009 period and $14.8 million in the 2008 period, a decrease of $0.8 million, or
5.4%. This decrease was due to the decrease in sales partially offset by
increased raw material costs. Cost of revenues as a percentage of revenues for
the Licorice Products segment was 54.5% in the 2009 period as compared to 53.8%
in the 2008 period.
Selling, General and Administrative Expenses:
Three Months Three Months
Ended Ended
$ in millions March 31, 2009 March 31, 2008
Consolidated Selling, General and Administrative Expenses:
Harland Clarke Segment $ 56.1 $ 63.0
Harland Financial Solutions Segment 29.4 34.4
Scantron Segment 15.8 12.1
Licorice Products Segment 3.3 2.8
Corporate 5.2 6.2
Total $ 109.8 $ 118.5
|
Selling, general and administrative expenses decreased by $8.7 million to
$109.8 million in the 2009 period from $118.5 million in the 2008 period. The
Data Management Acquisition accounted for an increase of $3.3 million in
selling, general and administrative expenses.
Selling, general and administrative expenses for the Harland Clarke segment
decreased by $6.9 million, or 11.0%, to $56.1 million in the 2009 period from
$63.0 million in the 2008 period, primarily due to labor cost reductions and
decreases in integration-related expenses, partially offset by an increase in
depreciation due to integration-related capital expenditures in 2008. Selling,
general and administrative expenses as a percentage of revenues for the Harland
Clarke segment were 17.8% in the 2009 period as compared to 19.0% in the 2008
period.
Selling, general and administrative expenses for the Harland Financial
Solutions segment decreased by $5.0 million, or 14.5%, to $29.4 million in the
2009 period from $34.4 million in the 2008 period, primarily due to labor cost
reductions and decreases in travel expenses and depreciation. These decreases
were partially offset by foreign currency translation losses. Selling, general
and administrative expenses in the 2009 and 2008 periods included charges of
$1.0 million and $2.5 million, respectively, for compensation expense related to
an incentive agreement for an acquisition. Selling, general and administrative
expenses as a percentage of revenues for the Harland Financial Solutions segment
was 42.5% in the 2009 period as compared to 48.3% in the 2008 period.
Selling, general and administrative expenses for the Scantron segment
increased $3.7 million to $15.8 million in the 2009 period from $12.1 million in
the 2008 period, due to the Data Management Acquisition, which accounted
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M & F Worldwide Corp. and Subsidiaries
for $3.3 million of the increase, approximately $1.3 million in one-time
expenses related to a contractual obligation owing to a former employee upon
termination of employment and integration-related expenses. Increases in
selling, general and administrative expenses were partially offset by cost
reductions. Selling, general and administrative expenses as a percentage of
revenues for the Scantron segment was 29.0% in the 2009 period as compared to
29.1% in the 2008 period.
Selling, general and administrative expenses for the Licorice Products
segment increased to $3.3 million in the 2009 period from $2.8 million in the
. . .
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